Thieves steal Dollar General’s holiday cheer

Discounter sees more ‘shrink’ from higher-cost items

NEW YORK (MarketWatch) — Like other retailers, discounter Dollar General Corp. is feeling the uncertainty about the fiscal cliff and other economic jitters this holiday season, but that’s not all it has to worry about.

Theft, it turns out, is also a major worry. Dollar General
DG, +0.32%
on Tuesday reported a better-than-expected third-quarter profit. But its gross margin narrowed and missed Wall Street expectations, hurt not only by increased discounts to attract shoppers and fend off competition but also by increased “shrink,” which in industry parlance refers to shoplifting, employee theft, paperwork errors and supplier fraud.

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The dollar-store chain said while the number of items that have been lost has declined, it’s seeing more loss of items costing more than $5. Dollar General has introduced more branded products such as Hasbro and Disney toys and next year will roll out to the majority of its 10,000-plus stores tobacco and cigarettes, a category that experiences higher than average theft but is also seen as a key traffic driver.

For the holiday season, the company expects shrink to continue in the fourth quarter and doesn’t expect the situation to improve until the second half of next year.

Dollar General shares fell 5.5% Tuesday, the biggest decliner in the S&P 500.

“While they are experiencing greater shrink, overall, these high-value (stock-keeping units) are driving increased sale and higher-margin dollars,” said Chief Financial Officer David Tehle on a conference call.

To combat the issue, Tehle said Dollar General has employed several “defensive” measures in fixtures, spiral pegs, flip-up windows, and labeling that it expects to “gain traction” in the second half of the year.

“We continue to develop our optimized shrink model on a store-specific basis but data-driven analysis, looking at what the individual shrink should be for each of our over 10,000 stores versus where they are today and then taking appropriate action,” he said, adding the company is “well aware” that tobacco and cigarettes are “a high-strain category” that’s been factored into its estimates and modeling.

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While earnings beat estimates, Dollar General’s margins have been hit by theft and other “shrink” losses.

Dollar General isn’t the only retailer dealing with the issue. While retail theft rates last year declined, it’s still a multibillion dollar problem that retailers are grappling with, according to the National Retail Federation.

Shrink decreased to $34.5 billion, or 1.41% of retail sales last year, from $37.1 billion, or 1.49% in 2010. However, retailers said they were seeing an increase in organized crime, with 96% of retailers saying they have been a victim of organized retail crime over the last 12 months, NRF said in a June survey.

The survey showed employee theft represents about 43.9% of total losses, with shoplifting another 36%.

This holiday season alone, retailers expect 4.5% of holiday returns to be fraudulent, costing them $2.9 billion, according to a separate NRF survey of 60 retailers in October and released Dec. 4. For the year, return fraud is expected to total $8.9 billion in loss for the industry.

The survey showed “wardrobing” – the return of used, non-defective merchandise like special-occasion apparel and certain electronics — is a big industry concern, with about two-thirds of retailers saying they have been victims of this activity within the last year.

Meanwhile, 45.6% of retailers have found criminals using counterfeit receipts to return merchandise and eight out of 10 retailers said they’ve seen employee-return fraud or collusion with external sources.

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